What’s in a Charter

For more than 150 years, Congress has articulated a clear view that the benefits of being a full-service bank come with corresponding regulatory obligations. Banks have the right to accept deposits, make loans and process payments. Banks can also access the federal safety net of FDIC insurance and the Federal Reserve discount window. In exchange for these authorities, banks must operate prudently and comply with stringent regulations, such as capital and liquidity requirements, activity restrictions and consumer protection standards. Banks are subject to regular examinations, and their parent companies are subject to consolidated supervision by the Federal Reserve.

Recently, digital asset firms and other nonbanks have sought limited-purpose bank charters, ostensibly to engage in a limited suite of activities. These charters differ in scope and oversight, yet some of these entities appear to be seeking limited-purpose charters even though they intend to engage in traditional banking activities, such as deposit taking, without being subject to the full suite of prudential safeguards that apply to full-service traditional banks. Moreover, some of these entities are seeking to obtain these charters as a means to obtain a Federal Reserve master account, even though their activities may exceed the scope of what the charter permits. If successful, this regulatory arbitrage could undermine the safety and soundness of those institutions and the financial system more broadly and harm consumers, because these entities would be engaging in a broader set of activities than the limited charter permits without abiding by the critical safeguards established by Congress.

See below for an overview of several charter types and the authorities and requirements related to each.

Full-Service National Bank Charter

A national bank charter authorizes a financial institution to conduct the "business of banking": lending, taking deposits and processing payments. In return for the right to engage in these activities, the institution and its holding company must operate in a safe and sound manner, comply with a wide range of prudential regulations and only engage in banking and related activities. These charters have federal deposit insurance and benefit from federal preemption.^[1]

• Primary Regulator: OCC
• Gaps in Regulation: None. This is a full-service banking charter subject to the full suite of federal banking regulations and direct oversight by the federal prudential regulators. The parent company of a full-service national bank charter is subject to consolidated supervision by the Federal Reserve.
• Notable Examples: Many large insured depository institutions, including subsidiaries of several BPI members, such as Bank of America, Capital One, Fifth Third and PNC are chartered by the OCC at the federal level. Erebor recently received conditional approval for this type of charter.

National Trust Company Charter

National trust companies are chartered by the OCC and are generally uninsured and restricted to the activities of a trust company: fiduciary activities and related activities, such as custody services for individuals or businesses. Trust companies cannot take demand deposits or make loans. These institutions are not regulated at the holding company (parent company) level and are not subject to the full set of federal banking regulations (unless the holding company separately owns a bank). These entities benefit from federal preemption.

• Primary Regulator: OCC
• Gaps in Regulation: National trust companies are not subject to the full set of regulations that are generally applicable to full-service commercial banks. For example, national trusts typically are chartered with a condition specifying a minimum dollar amount of capital and, in some cases, a minimum amount of liquidity that must be initially maintained instead of being subject to the generally applicable bank capital and liquidity rules. Further, a national trust bank is typically not a bank for Bank Holding Company Act purposes, so the parent company is not subject to consolidated supervision or BHC activities limitations if it is not otherwise a BHC. Trust banks also generally do not obtain deposit insurance and are typically not subject to the Community Reinvestment Act.
• Notable Examples: Several BPI members have national trust companies, including Wells Fargo, U.S. Bank, Goldman Sachs, Raymond James, BNY and State Street. BPI members generally use their trust companies to manage personal trusts as part of their wealth management businesses and/or corporate trust activities (e.g., serving as corporate trustee, agent, custodian). In addition, BlackRock, Vanguard, Brown Brothers Harriman, ADP and TIAA have national trust companies. However, this type of charter has become particularly popular among crypto firms. Coinbase, Circle, Paxos and Ripple have all applied for national trust charters.

Uninsured State-Chartered Depository Institution Charter

Several states offer various forms of limited-purpose banking charters. Some states have offered charters for crypto companies and other tech firms that do not require FDIC insurance. For example, Wyoming's Special Purpose Depository Institution (SPDI) charter permits institutions to accept customer deposits but does not require FDIC insurance, and SPDIs may conduct other banking activities (including custody, asset servicing and fiduciary activities), but may not make loans. Deposit liabilities must be fully reserved (i.e., the institution must hold unencumbered liquid assets valued at least 100 percent of customer deposits). These institutions also do not benefit from federal preemption.

• Primary Regulator: State banking authorities, such as the Wyoming Division of Banking or Connecticut Department of Banking
• Gaps in Regulation: No federal consolidated supervision; no deposit insurance.
• Notable Examples: Custodia, Kraken (both have SPDI charters).

Industrial Loan Company Charter

ILCs, also known as industrial banks, are a type of state-chartered depository institution. ILCs benefit from the privileges of being an insured commercial bank with deposit insurance, access to the discount window and the payments system should they obtain a master account. ILCs cannot accept demand deposits, but this requirement is easily circumvented, as they can offer "NOW" accounts, which are very similar. However, ILCs are exempt from the definition of "bank" under the BHCA. As a result, their affiliates and corporate parents are all exempt from the activities restrictions and consolidated supervision under the BHCA.

• Primary Regulator: State banking authorities, such as the Utah Department of Financial Institutions
• Primary Federal Regulator: FDIC
• Gaps in Regulation: No consolidated federal supervision or activities restrictions for parent. This enables ILC parent companies to engage in commercial activities, subverting the longstanding principle underlying bank regulation in the United States that banking and commerce be separated. Parent companies are not subject to Fed supervision, consolidated capital requirements or data privacy protections.
• Notable Examples: Nelnet, Square. Walmart, Home Depot and Rakuten have sought ILC charters previously; however, these applications were withdrawn.

Additional Resources

• Comparing Supervisory Frameworks: Bank Holding Companies vs. ILC Parent Companies
• Medieval Money Changers, FinTechs, and the Risk of Unbundling
• Beware the Kraken
• Why a Wyoming Charter Is No Hail Mary for the Anti-Fractional Banking Team
• FinTech Access to Fed Accounts and the Nation's Payments Systems: A Primer
• Tangled Up in Technicalities - A Historical Perspective on the Current ILC Debate
• FinTech and Big Tech Companies Want the Benefits of Banking Without the Responsibilities. Loopholes Could Let Them Succeed.
• Is It OK for FinTechs To Use Regulatory Arbitrage To Avoid Consolidated Supervision?
• Industrial Loan Company (ILC) Issue Summary
• Financial Services and Consumer Groups Support Senate Bill to Close Industrial Loan Company Loophole
• Banks, Credit Unions and Consumer Groups Support H.R. 5912, The Close the ILC Loophole Act
• Banks, Credit Unions and Consumer Groups Call for Passage of Bipartisan Solution to Close ILC Loophole
• Financial System Integrity Depends on Congressional Action on ILCs

[1] States also can charter insured depository institutions. For these banks, the primary federal regulator is either the Federal Reserve or the FDIC.